Explained: Investors can now trade in gold similar to shares with launch of EGRs

NEW DELHI: Investors can now trade in gold similar to shares with the launch of Electronic Gold Receipts (EGR) by leading stock exchange BSE.The Bombay Stock Exchange launched Electronic Gold Receipt (EGR) on its platform during the Muhurat trading on Diwali, a move that will help in efficient and transparent price discovery of the yellow metal.It introduced two new products of 995 and 999 purity.Trading will be in multiples of 1 gram and deliveries in multiples of 10 gram and 100 gram.The trading of gold would be carried out in three phases: conversion into EGRs from the physical gold, trading of the e-receipts and again conversion of the e-receipts into physical metal. EGRs will cater to all market participants, which means that buyers and sellers on the exchange will include individual investors, as well as commercial participants along the value chain like importers, banks, refiners, bullion traders, jewellery manufacturers, and retailers.Gold will first have to be converted into a Demat account similar to share trading and then with the receipt investors can trade in gold. This Gold will be in vaults and vault manager will be provided by ERG.Gold can be delivered in 10 grams and 100 grams. 10-grams gold delivery can be in the form of a bar or coin and 100 grams of gold will be only delivered in a bar.The announcement came after the exchange last month received final approval from the Securities and Exchange Board of India.What is an EGR?Electronic Gold Receipts are similar to Dematerialized form of shareS where they are issued in exchange for physical gold (similar to physical form of equity shares).EGRs will have trading, clearing and settlement features akin to other securities that are currently available in India.For EGRs, the physical gold is sourced through imports, accredited domestic refineries, or designated delivery centres.Who is responsible for EGR?The e-receipts, according to the SEBI gold exchange framework, will be handled by vault managers who are SEBI accredited. The vault managers are not only responsible for the creation of the EGRs but also for withdrawals, deposits, and redressal of grievances, among others. According to SEBI gold exchange framework, the vault manager would need to have a net worth of at least Rs 50 crore.How to convert physical gold into EGR?A buyer can convert the physical gold into an EGR by depositing the yellow metal at the designated delivery centre. Once the gold is sourced, a depository receipt is created for trading on BSE.A Vault Manager on receipt of physical gold shall record the relevant information in the common interface and create the EGR. The EGR will then reflect in the demat account of the beneficial owner maintained with the Depository Participant.How do you purchase an EGR?Investors can buy an EGR using their Demat account, It is the same process as you buy a stock. The purchasing and selling of EGR is comparable to stock trading.The Gold exchange will offer the facility to convert Gold into EGRs, trading in EGRs and reconverting EGRs back to gold.How to convert physical gold into EGRBeneficial owner of EGR intending to obtain physical gold against the EGR/s shall request the Depository for the same. The Depository, in turn shall forward such request/s to the Vault Manager. The Vault Manager after delivering the gold to the beneficial owner and simultaneously extinguishingsuch EGR/s, shall share the required data with the Depository for reconciliation.The Depository will send the information about the extinguished EGRs, to the stock exchanges and clearing corporations to carry out necessary revision in the records.If there are any disputes, related to quality of physical gold, at the time of withdrawal of physical gold, the same would be dealt with by obtaining quality report from empaneled assayer.However, once the physical gold is outside the vaulting infrastructure, no dispute related to quality of gold shall be entertained / resolved under this framework.How will the Gold Exchange work?The gold exchange will facilitate trading of gold in the form of Electronic Gold Receipt (EGR). The trading, clearing, and settlement features of EGRs will be similar to other securities like stocks."Investors can convert their physical gold in to Electronic Gold Receipts. The person can hold the EGRs for as long as he/she intends, since it will have perpetual validity. They can also convert it back to physical gold by surrendering their EGR. The Clearing Corporation will settle the trades executed on stock exchanges by way of transferring EGRs and funds to the respective buyer and seller," said Divya Grover, Research Analyst at PersonalFN.Apart from retail investors, Banks, Foreign Portfolio Investors, Jewellers, Bullion traders can also trade on Gold exchange.Why do we need EGR?EGIR is a way of getting people to not hoard gold, by creating an exchange that provides transparent pricing and liquidity (to cash or back to gold).India is a net importer of gold. The idea is to move from being price takers to be price setters.Price discovery at the exchanges will thus lead to transparency in gold pricing.A platform for EGR infuses transparency in gold spot transactions, enables India to emerge as the price setter, and would eliminate existing market inefficiencies.Another investment avenueThe availability of electronic gold receipts would also add another investment option for gold investors. There is trading in gold futures and options in India but spot gold trading would add a new option, according to brokerage Angel One. Spot trading involves buying and selling of assets at the current or live market price, which is called the spot price.Gold investment options currently in India include gold exchange-traded funds (ETFs), sovereign gold bonds (SGBs), and digital gold, apart from investing in physical gold in the form of coins, bars, or jewellery.How will it be taxed?Like gold ETFs, these receipts will attract capital gains tax of 20% if the investment is held for more than three years. In this case, the investor can avail indexation benefits, which allows for the calculation of tax net of the prescribed rate of inflation.